Formally, the IMF has released its latest tranche of funds for Greece because the EU has said it will stand by Greece. Unofficially, the Fund bunged Athens the money because the consequences of not doing so are too horrible to contemplate; it could trigger, via political collapse in Athens, a chaotic default and financial panic across Europe. We would be looking at nothing less than "Credit Crisis 2", the sequel to a particularly grisly horror flick first screened in 2008.
The first tremor would be felt in the European Central Bank and national central banks. They would be looking at losses of anything north of €30bn and would require recapitalisation from individual governments (those who can, that is). Even an orderly, "voluntary" reduction in Greece's debt burden would involve losses for the banks, pension funds and central banks that hold those bonds. The losses would be expensive, and would make another loan look cheap.
The second, larger tremor would rumble through Europe's commercial banks. Greece's financial system would burn out, the cash machines would stop working, the e-payments system would collapse and the economy with it. It would not stop there. Some European banking groups hold billions of euros in Greek bonds directly; RBS in the UK holds €500m, relatively modest. Including their Greek subsidiaries, Credit Agricole (€21.1bn), Societe Generale (€3.4bn) and BNP Paribas (€5bn) are heavily exposed. So are German and Belgian institutions. Could governments afford to bail the banks out again? Not necessarily.
Third comes contagion. When no one knows who is holding what toxic assets the easiest thing to do is to stop lending to anyone. That also means the banks stop lending to the real economy, first-time buyers, people wanting car loans, businesses, which would kill growth. If we're really unlucky the panic would spread from Greece, Portugal and Ireland to Spain; yesterday the markets ominously sold off Spanish government bonds. Spain would need a full-blown IMF operation.
Then the shockwaves start feeding on each other. Nations that need to shore up broken banks borrow more, adding to their debts; bad debts in the depressed real economies pile up, draining the banks' reserves and reducing tax revenues and adding to budget deficits; investors dump bonds, shares and property into sinking markets, triggering more panic selling and shredding confidence. Inflation turns into falling prices and wages and we see negative equity for all. Scary, no?
The Greeks have everyone over a barrel, as the European Central Bank, the French and the Italians see clearer than most. So it really is a lot easier, and perfectly rational, for the IMF and the eurozone to just kick the can down the road again, and dole out another loan. Which is precisely what the EU's leaders will agree at their summit next week. They've seen enough disaster movies.